Private equity cash drying up for brokers: S&P

Private equity cash drying up for brokers: S&P: "The private equity-funded acquisitions that were popular just more than a year ago are coming to a halt, which is opening the door to global insurance brokers, according to a report issued Tuesday by Standard & Poor’s Corp.

In its report, S&P said private equity cash flows are drying up due to economic downturn, which is dampening brokers’ ability to execute leveraged buyouts like they did in 2007 when private equity firms funded the acquisitions of USI Holdings Corp., Hub International Ltd. and Crump Group Inc. Instead, S&P said global insurance brokers such as Aon Corp., Marsh & McLennan Cos. Inc. and Willis Group Holdings Ltd. now are in a financial position to acquire smaller brokerages.

“The era of private equity leveraged buyouts in the insurance broker sector is overdue to a fundamental shift in debt market and broker industry fundamentals,” S&P wrote, adding that private equity acquisitions are predicated on cheap debt and strong cash flow. “As such, we expect that future acquisitions will be predicated on larger brokers acquiring smaller brokers with the goal of enhanced economies of scale.”

Global brokerages have had to deal with the “competitive disadvantage” of foregoing contingent commissions, which S&P said limited them in being able to pursue acquisitions as they were forced to find other ways of replacing the lost revenue.

However, in May 2008, the New York State Attorney General amended the agreement with Aon, Marsh and Willis to allow the brokerages to accept contingent commissions on acquired business for up to three years. This development “has significantly narrowed the competitive gap for the global broker” in regard to their appetite for acquisitions, S&P said."

Source: Business Insurance